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November 2012, European Leveraged Loan Market Analysis

This monthly overview details European leveraged finance trends and activity during October 2012.

October recap:

• Loan issuance shot up to €3.7 billion from €2.3 billion in September. HY issuance came down to €3.5 billion from €7.2 billion.

• According to JP Morgan HY research: positive fund flows sustained for the 18th straight week, totaling an estimated €664 million for October 2012, bringing the year-to-date number to almost €4.6 billion.

• Secondary markets are up, loan markets went up 60 bps to finish the month at 96.35 while high-yield markets are up 125 bps to finish the month at 99.97.

• The S&P European Leveraged Loan Index (ELLI) finished the month up at 0.47% (till the week ending October 25th).

• Default rates, however, stabilized during the month.

Secondary markets -- Leveraged loans:

Focusing on the secondary loan market, this chart details the average price of LCD’s European Loan Flow Name Composite -- a measure of the 12 largest, most liquid loans (consisting of 10 issuers) -- since 2002.

Secondary loan prices rose 60 bps to finish the month at 96.35.

Secondary markets -- High yield bonds:

This next chart details the average price LCD’S European High Yield Flow Name Composite -- a measure of the 12 most liquid high yield issues – since the beginning of the year 2010.

The high-yield market finished the month at 99.97 up 125 bps.

ELLI:

This chart details the monthly return of the ELLI, a broad measure of European loan market returns that LCD calculates. All returns are ex-currency unless otherwise stated.

The European loan market had a positive return of 0.47% for the month of October (week ending 25th of October), down from the 0.63% in September.

The total ELLI return for the first ten months of 2012 is positive 7.84% versus 0.71% for the same period last year.

Primary market:

Turning from the secondary to the primary, this graph details new-issue volume for both leveraged loans and high-yield bonds.

October saw European monthly loan volume jump to €3.7 billion from ten transactions. This is a five-month high since each of the preceding four months saw less than €3 billion and between seven and eight transactions. Year-to-date new issuance for loans (through the end of October), €24.2 billion, was down 43% from this time last year.

European borrowers took advantage of the excess liquidity sloshing around the continent’s loan market this October to launch a mixture of re-financings, re-pricings, and recapitalisations including those for RAC, Iglo Birds Eye and IMS Health.

The high-yield bond market lost some its September fire, as only €3.5 billion of paper priced, based on 10 bonds, about half of €7.2 billion and 19 bonds a month ago.

Nonetheless, the year-on-year gap with 2011 has declined to just 11% as of Oct. 31, with this year’s tally at €30.5 billion to last year’s €34.5 billion.

Default rate:

The default rate by principal amount moved up to 6.3% at the end of October 2012, up from the 6.2% at the end of September. Meanwhile the default rate by issuer count stayed at 8% in October.

Themes to watch for going forward:

• No significant changes to the quantative easing policies from the ECB.

• More inflows into high-yield bond funds on the back of stability in the secondary markets.

• Extremely short window of opportunity for deals before the end of the year.

• A-to-E to continue as issuers seek to address their maturity concerns